Portion of the 1998 Annual Report to Shareholders for the year ended
December 31, 1998 which is incorporated by reference in this filing
on Form 10-K.

E'TOWN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

E'town Corporation (E'town or Corporation), a New Jersey holding company,
is the parent company of Elizabethtown Water Company (Elizabethtown or Company),
Edison Water Company (Edison), E'town Properties, Inc. (Properties), Liberty
Water Company (Liberty), Applied Water Management, Inc. (AWM) and Applied
Wastewater Management, Inc. (AWWM). The Mount Holly Water Company (Mount Holly)
is a wholly-owned subsidiary of Elizabethtown. The assets and operating results
of Elizabethtown constitute the predominant portions of E'town's assets and
operating results. Mount Holly contributed about 3% and Liberty, AWM and Edison
each contributed 4% of the Corporation's consolidated operating revenues for
1998. The regulated utilities, Elizabethtown, Mount Holly and AWWM, comprise the
Regulated Utilities segment, Liberty and Edison comprise the Contract Operations
segment, AWM is the Engineering/Operations/ Construction segment and E'town and
Properties comprise the Financing and Investment segment (See Notes 2 and 14 to
E'town's Notes to Consolidated Financial Statements). The following analysis
sets forth significant events affecting the financial condition of the various
segments at December 31, 1998, and the results of operations for the years ended
December 31, 1998 and 1997.

LIQUIDITY AND CAPITAL RESOURCES 
CAPITAL EXPENDITURES PROGRAM 
In 1998 capital expenditures, including concession fees in connection
with privatization contracts, were $67.2 million, of which $19.9 million was for
the Liberty privatization contract (as discussed below), $2.7 million was for
construction expenditures for the Edison privatization contract and $44.6
million was for water utility plant. For the three years ending December 31,
2001, capital and investment requirements for E'town are estimated to be $181.4
million, consisting of (i) expenditures for the Regulated Utilities Segment
($107.5 million for Elizabethtown, $17.0 million for Mount Holly and $16.4
million for AWWM), (ii) investments in the Contract Operations segment for
concession payments for Liberty, and capital improvements for Liberty and Edison
of $39.0 million, and (iii) investments in the Engineering/
Operations/Construction segment of $1.5 million. See "Economic Outlook" for a
discussion of Contract Operations and the acquisition of AWM and AWWM. These
estimates do not include any amounts for possible additional acquisitions or
privatization activities in the three-year period

REGULATED UTILITIES SEGMENT
ELIZABETHTOWN
While Elizabethtow's projected capital outlays have dropped from
recent years now that the Canal Road Water Treatment Plant (Plant) is completed,
Elizabethtown's facilities will continue to be upgraded and expanded to handle
customer growth. Elizabethtown's three-year capital program includes $50.6
million for routine projects (services, hydrants and main extensions not funded
by developers) and $56.9 million for transmission system upgrades, a new
operations center and other projects. Elizabethtown expects to file for rate
relief later in 1999 and periodically thereafter to ensure that such costs are
adequately reflected in rates (see Economic Outlook).

MOUNT HOLLY
During the next three years, Mount Holly expects to spend $17.0 million,
primarily for an additional supply source to comply with state regulations
designed to prevent further depletion of a local aquifer.

Mount Holly currently obtains all of its water from wells drilled into an
aquifer, which has been subject to over- pumping by various users in a portion
of southern New Jersey. The state adopted legislation requiring all local
purveyors, including Mount Holly, to obtain alternate supplies and reduce their
withdrawals from the affected parts of the aquifer. Mount Holly designed a
project to obtain water from outside the affected part of the aquifer for
delivery into the Mount Holly system. In August 1998 the New Jersey Board of
Public Utilities (BPU) adopted a Stipulation among Mount Holly and other parties
concluding that this project (the "Mansfield Project") is the most cost-
effective method for Mount Holly to comply with the state regulations.

To settle an appeal initiated by New Jersey-American Water Company (NJAM)
concerning the diversion rights for the Mansfield Project, Mount Holly signed a
Stipulation with NJAM, the New Jersey Department of Environmental Protection
(DEP) and other parties, requiring Mount Holly to purchase one million gallons
per day from NJAM during the period that the Mansfield Project is being
constructed. Purchases began during March of 1998, after completion of an
interconnection.

In September 1997 Mount Holly filed a petition with the BPU to establish a
Purchased Water Adjustment Clause (PWAC) to reflect the cost of water purchased
from NJAM under the agreement discussed above. On May 27, 1998, the BPU adopted
a Stipulation signed by the parties to the PWAC case for an increase in annual
revenues under Mount Holly's PWAC of $1.3 million or 38.9%. Mount Holly deferred
the increase in purchased water cost between March 19 and May 27 as other
unamortized expenses. Recovery of this amount has been requested in the rate
increase discussed below. As of December 31, 1998, Mount Holly has deferred $.1
million of these costs.

Mount Holly filed for a rate increase in January 1999 to reflect a portion of
these expenditures, as well as to increase the rates of return realized and,
therefore, the contribution to E'town's earnings per share.

AWWM
In 1998 E'town exercised an option to acquire the Applied Wastewater Group
(AWG), its joint venture partner for the past three years, in a stock-for-stock
transaction. E'town established new subsidiaries, AWM and AWWM, which offer
"one-stop shopping" for water and wastewater services to residential and
commercial developers. These services include the design, construction and
operation by AWM of water and wastewater facilities and, in some instances,
purchase of such utilities at project build-out by AWWM, thereby adding to
E'town's regulated utility customer base. AWWM expects to incur capital
expenditures of $16.4 million in the next three years, the predominant portion
of which is expected to be spent in 1999 and 2000. These expenditures are
primarily for the purchase of wastewater plants from developers upon completion
of their construction by AWM.

CONTRACT OPERATIONS SEGMENT
LIBERTY
Effective July 1, 1998, E'town, through Liberty, has entered into a contract
with the city of Elizabeth (Elizabeth), New Jersey to operate its water system
under a 40-year contract serving 17,900 customers. Under the contract, Liberty
made a payment to Elizabeth of $19.7 million in 1998 and is contractually
obligated to make payments to Elizabeth of $12 million in June 1999 and $19
million in June 2000, which have been included in non-utility property and other
investments as concession fees on privatization contracts, net of amortization.
Also, under the terms of the contract, Liberty will deposit $57.8 million from
revenues earned during the 40-year contract, of which $52.4 million is due after
2012, into a fund administered by Elizabeth to be used by Elizabeth to pay for
capital improvements to the water system. In addition, Liberty is responsible
for $7.8 million of construction expenditures, primarily for meter replacements,
over the life of the contract. Of the total construction expenditures,
approximately $4.0 million is expected to be expended in the next three years.

EDISON
Effective July 1, 1997, E'town, through its Edison Water Company subsidiary,
commenced operation of Edison Township's 11,600-customer water system under a
20-year contract. E'town paid the township $6.3 million at closing in concession
fees and expects to spend $3.6 million during the next three years to upgrade
the system.

ENGINEERING/OPERATIONS/CONSTRUCTION SEGMENT
AWM
AWM expects to incur capital expenditures of $1.5 million during the next
three years. These expenditures consist primarily of vehicles and equipment used
in the construction and waste hauling operations.

CAPITAL RESOURCES
During 1998 E'town financed 35.5% of its capital expenditures, including
concession fees for the Regulated Utilities segment and investments in the
Contract Operations and Engineering/Operations/Construction segments, from
internally generated funds (after payment of common stock dividends). The
balance was financed with a combination of short-term borrowings under lines of
credit, proceeds from capital contributions from E'town (funded by issuances of
Common Stock under the Corporation's Dividend Reinvestment and Stock Purchase
Plan) and long-term debt.

For the three-year period ending December 31, 2001, E'town estimates that 52.2%
of its currently projected capital expenditures and concession fees for all
segments are expected to be financed with internally generated funds (after
payment of common stock dividends). The balance will be financed with a
combination of proceeds from the sale of E'town common stock, medium-term notes,
proceeds of tax-exempt New Jersey Economic Development Authority (NJEDA) bonds,
and short-term borrowings. Mount Holly's Mansfield Project will be financed by
requisitions from the New Jersey Environmental Infrastructure Trust Financing
Program. The NJEDA has granted preliminary approval for the financing of almost
all of Elizabethtown's major projects during the next three years. Elizabethtown
expects to pursue additional tax-exempt financing to the extent that final
allocations are granted by the NJEDA.

In October 1998 E'town filed a registration statement with the Securities and
Exchange Commission (SEC) to issue up to $75 million of unsecured medium-term
notes. The SEC is currently reviewing the filing. E'town plans to issue
approximately $25 million of these notes in the first half of 1999 to repay
short-term debt incurred to finance concession fees for Liberty.

In November 1998 Mount Holly closed on two loans that will provide up to $13.2
million in 2.60% financing for the Mansfield Project through the New Jersey
Environmental Infrastructure Trust Financing Program. The first loan, in the
amount of $7.3 million, is through the New Jersey Environmental Infrastructure
Trust (Trust), which issued tax-exempt bonds with average interest rates of
4.7%. The second loan, in the amount of $5.9 million, is from the state of New
Jersey, acting through the New Jersey Department of Environmental Protection,
funded by federal monies at no interest cost. The effective interest rate for
the combined notes is approximately 2.60%.

In December 1997 E'town signed an agreement to issue $12 million of 6.79% Senior
Notes due December 15, 2007. E'town issued $4 million of these notes in December
1997, $6 million in January 1998 and $2 million in May 1998. The proceeds were
used to finance capital additions for Edison as well as to meet working capital
needs.

E'town's senior debt is currently rated A3 and A- and Elizabethtown's
senior debt is currently rated A3 and A by Moody's Investors Service and
Standard & Poor's Ratings Group, respectively. 

INTEREST RATE RISK 
The Corporation is subject to the risk of fluctuating interest rates in the
normal course of business. The Corporation manages interest rates through the
use of fixed and, to a lesser extent, variable rate debt. As of December 31,
1998, a hypothetical single percentage point change in interest rates would
result in a $.9 million change in interest costs and earnings before tax related
to short-term and variable rate debt.

RESULTS OF OPERATIONS
NET INCOME for 1998 was $22.3 million or $2.70 per share on a basic basis as
compared to $19.3 million or $2.44 per share for 1997. Net income increased by
$3.1 million or $.26 per share, comprised of (i) $.6 million or $.07 per share
due to an extended dry period in the summer of 1998 resulting in higher water
consumption than in 1997 (ii) $1.1 million or $.13 per share was from lower
operating expenses due to a combination of a mild winter in 1998, more efficient
use of our work force, lower employee benefit costs and success with our ongoing
cost control efforts and (iii) earnings of $.5 million or $.06 per share from
the Contract Operations and Engineering/Operations/Construction segments, which
are new operations. Capitalized construction interest accounted for an increase
in net income of $.5 million or $.06 per share. These increases in earnings per
share were partially offset by an increase in the number of outstanding shares.

Net Income for 1997 was $19.3 million or $2.44 per share on a basic basis as
compared to $15.1 million or $1.96 per share for 1996. The increase in net
income and earnings per share from the Regulated Utilities segment is
attributable to the $21.8 million rate increase for the new Canal Road Water
Treatment Plant (Plant) in October 1996, which was offset by the operating and
financing costs of the Plant. Net income also increased $1.4 million, or $.17
per share, primarily due to variations in the weather, specifically the dry
summer of 1997, as compared to the wet summer of 1996.

OPERATING REVENUES increased $11.7 million or 8.7% in 1998 over the comparable
1997 amount. The increase from the Regulated Utilities segment is primarily
comprised of $1.4 million from water service to residential and wholesale
customers attributable to increased water consumption as a result of warmer,
drier weather in the summer of 1998 than in 1997. The revenue increase includes
$3.3 million (net of intercompany sales) from the Contract Operations segment,
comprised of Edison and Liberty. The Engineering/ Operations/Construction
segments, comprised of AWM, contributed $5.2 million to operating revenues. New
customers and the PWAC rate increase for Mount Holly account for the remainder
of the increase.

Operating Revenues increased $23.4 million or 21.2% in 1997 over the comparable
1996 amount. The increase is primarily comprised of $17.7 million from a rate
increase for Elizabethtown effective October 1996, $1.5 million from the
operation of Edison Water Company (net of water purchased from Elizabethtown)
and $3.1 million from increased water consumption due to the dry summer of 1997.

OPERATION EXPENSES increased $5.9 million or 12.2% in 1998 over 1997. The
operating expenses (net of intercompany expenses) of the Contract Operations and
Engineering/ Operations/Construction segments, which are newly established
businesses, accounted for $7.1 million of the increase. The Regulated Utilities
segment experienced decreases of $1.0 million from lower operating costs due to
a mild winter, greater work force utilization, ongoing cost control efforts and
decreased employee benefit costs. These decreases were partially offset by
increased cost of labor, purchased water for Mount Holly and variable costs for
the higher water sales.

Operation expenses increased $3.2 million or 7.1% in 1997 over the comparable
1996 amount. An increase of $.9 million resulted from the operations of Edison
Water Company, which was formed in July 1997. Increases resulting from variable
costs associated with the increase in water consumption totaled $.3 million.
Other increases included costs associated with Applied Watershed Management
(E'town's joint venture) of $.5 million and labor costs of $.6 million.

The remainder of the increase is attributable to various items,
including operating costs for the Plant, information technology and other
administrative costs.

MAINTENANCE EXPENSES decreased $.1 million or 1.0% in 1998, as compared to 1997
due to improved procurement procedures and preventive maintenance programs.

Maintenance expenses increased $.7 million or 12.7% in 1997 over the comparable
1996 amount. This increase is primarily attributable to costs associated with
the maintenance of the Plant. The increase also includes $.4 million related to
the costs of determining the most cost-effective method for disposing of
byproducts generated from the water treatment process at the Raritan-Millstone
Plant.

DEPRECIATION AND AMORTIZATION EXPENSE increased $1.3 million or 10.4% in 1998
compared to 1997 of which $.9 million represents amortization of initial
concession fees and capital expenditures for the Contract Operation segment. The
balance represents depreciation on utility plant additions for the Regulated
Utility segment.

Depreciation and amortization expense increased $2.5 million or 25.3% in 1997
compared to 1996. The increase includes $2.1 million for the Plant and $.8
million for other utility plant additions. A decrease of $.6 million resulted
from Elizabethtown no longer being required by the BPU to depreciate utility
plant acquired through Contributions In Aid of Construction and Customers'
Advances for Construction. This change was agreed to by the parties to
Elizabethtown's last rate case effective in October 1996.

REVENUE TAXES increased $.2 million or 1.2% in 1998 and $2.7 million or 19.8% in
1997 due to the taxes on increases in operating revenues discussed above.

REAL ESTATE, PAYROLL AND OTHER TAXES decreased $.1 million or 4.0% in 1998. This
overall decrease was comprised of additional payroll taxes due to additional
labor costs, which were offset by decreases from lower-than-anticipated property
taxes on the Plant. These taxes increased $.2 million or 6.8% in 1997 due to
additional labor costs, as well as additional property taxes.

FEDERAL INCOME TAXES as a component of operating expenses increased $1.2 million
or 11.4% and $3.7 million or 54.4% as compared to 1997 and 1996, respectively,
due to the changes in the components of taxable income for all segments
discussed herein.

OTHER INCOME (EXPENSE) increased $.2 million or 32.4% due to a $.4 million
increase in Allowance for Funds Used During Construction (AFUDC), primarily for
Elizabethtown's western operations center. Federal income taxes increased $.1
million for the taxes on the AFUDC.

Other income decreased $2.2 million or 73.9% compared to the 1996 amount. A
decrease in the equity component of AFUDC of $3.5 million resulted from no
longer capitalizing the financing costs associated with the Plant as the
facility was placed in service in October 1996. An increase of $.2 million for
other miscellaneous items, as well as the offsetting federal income taxes
associated with the Other Income (Expense), account for the remainder of the
decrease.

TOTAL INTEREST CHARGES increased $.5 million or 2.8% due to increased borrowing
for utility plant expenditures for the Regulated Utilities segment and for the
concession fee for Liberty. The debt component of AFUDC increased $.3 million,
resulting in lower interest expense, as a result of higher construction
expenditures, primarily for Elizabethtown's new western operations center. This
decrease in interest charges was offset by the absence in 1998 of capitalized
interest on real estate investments for Properties of $.3 million.

Total interest charges increased $4.0 million or 30.2% in 1997 over the
comparable 1996 amount. The increase includes $3.1 million due to a reduction in
capitalized interest as a result of the Plant being placed in service in October
1996. Interest expense also increased due to increased borrowings incurred to
finance capital expenditures, the Edison contract and working capital needs.

ECONOMIC OUTLOOK 
FORWARD LOOKING INFORMATION
Information in this report includes certain forward looking statements within
the meaning of the federal securities laws. Any forward looking statements are
based upon information currently available and are subject to future events,
risks and uncertainties that could cause actual results to differ materially
from those expressed in the statements. Such events, risks and uncertainties
include, without limitation, actions of regulators, the effects of weather on
water consumption, changes in historical patterns of water consumption and
demand, including changes through increased use of water-conserving devices,
conditions in capital and real estate markets, future acquisitions and
privatization activities, increases in operating expenses due to factors beyond
the Corporation's control, changes in environmental regulation and associated
costs of compliance and other claims or assessments made upon the Corporation.

E'TOWN CORPORATION AND SUBSIDIARIES
During the next several years, management will seek to increase earnings per
share by (i) maximizing earned returns on the Regulated Utilities segment
through expansion efforts to increase sales and cost control measures and (ii)
investing in water and wastewater assets (including municipal privatization
contracts, as well as designing, constructing, operating and purchasing
wastewater assets through AWM and AWWM, discussed below) which produce a current
return. The Corporation intends to continue to sell Properties' real estate
holdings during the next several years to fund a portion of the investments
planned for the regulated and non-regulated businesses. The balance of such
funding will be generated from internal and external sources.

Earnings per share will vary going forward due to the effect of weather on costs
and pumpage, timing and adequacy of rate relief, time elapsed since the last
rate increase, the nonrecurring effect of real estate sales and other factors.
For 1999 E'town expects consolidated earnings per share to be similar to 1998,
based on somewhat reduced returns from the regulated operations, assuming a
return to normal weather patterns after the unusually dry summers in 1998 and
1997, to be offset by a gain on the sale of a parcel of land located in Green
Brook, New Jersey in February 1999 of $2.08 million or approximately $.25 per
share. In particular, Elizabethtown's returns should be somewhat lower in 1999
given that this year will be the third year since the last rate adjustment.

REGULATED UTILITIES SEGMENT
ELIZABETHTOWN, MOUNT HOLLY AND AWWM
Elizabethtown expects to petition the BPU for an increase in rates in 1999 to
reflect the increases in construction, financing and operating costs since base
rates were last established in October 1996.

Mount Holly earned a rate of return on common equity of 4.7% in 1998, compared
to an authorized rate of return of 11.25%, established in its most recent rate
proceeding. Mount Holly contributed $.04 to E'town's consolidated earnings per
share in 1998. Management expects Mount Holly to increase its contribution to
E'town's earnings per share later in 1999 and into 2000 upon receipt of
additional rate relief from the rate increase filed in January 1999, so that
Mount Holly can realize rates of return comparable to authorized levels. Mount
Holly earned significantly below its authorized return in 1998 and 1997 as the
Company was precluded from filing for needed rate relief due to ongoing
litigation with NJAM.

AWWM expects to realize rates of return
comparable to those earned by Elizabethtown on its anticipated investments of
$16.4 million in new wastewater facilities during the next several years.

CONTRACT OPERATIONS SEGMENT
LIBERTY 
Effective July 1, 1998, E'town, through its Liberty Water Company subsidiary,
commenced operation of the water supply system of the city of Elizabeth. Liberty
is expected to realize a return on its capital in an amount similar to that
currently earned by E'town's regulated operations.

EDISON 
Effective July 1, 1997, E'town, through its Edison Water Company subsidiary,
commenced operation of Edison Township's 11,600-customer water system under a
20-year contract. Edison is expected to realize a return on its capital in an
amount similar to that currently earned by E'town's regulated operations.
Contributions to earnings will be small through 2002 and then will increase as
rate increases specified in the contract take effect.

E'town continues to pursue opportunities to operate municipal water and
wastewater systems under long-term contracts, primarily in New Jersey. E'town is
particularly interested in opportunities where it may have a competitive
advantage due to location or experience in operation.

ENGINEERING/OPERATIONS/CONSTRUCTION
AWM
AWM provides "one-stop shopping" for water and wastewater services to
residential and commercial developers. These services include the design,
construction and operation of water and wastewater facilities and, in some
instances, purchase of such utilities at project build-out by AWWM, thereby
adding to E'town's regulated utility customer base. E'town expects the
acquisition to increase its contribution to E'town's earnings per share in 1999.

FINANCING AND INVESTMENT SEGMENT
E'TOWN AND PROPERTIES 
E'town is in the process of selling its various parcels of undeveloped land
carried as investments of $11.3 million at December 31, 1998. One of the real
estate parcels was sold in 1997 for $.4 million, resulting in a gain of less
than $.1 million. Two other parcels were sold in 1998 for $1.7 million resulting
in a gain of less than $.1 million. On February 17, 1999, Properties sold a
parcel of land, which has been under contract since 1995 in Green Brook, New
Jersey for $5.83 million, at a gain of $2.08 million net of taxes or
approximately $.25 per share to be reflected in earnings in the first quarter of
1999. Cash proceeds from this sale of $1.5 million were received in 1999 and the
remaining $4.33 million will be paid over the next two years. Properties has
entered into contracts for the sale of all of its remaining parcels at prices
that exceed the carrying cost of such properties. The eventual sale of these
parcels is contingent upon the purchaser obtaining various approvals for
development and could take several years. E'town expects to invest the sale
proceeds from the remaining parcels into water and wastewater utility
investments that produce a current return. The Corporation has no plans to make
additional investments other than in water and wastewater projects.

NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 of E'town's Notes to Consolidated Financial Statements for a
discussion of new accounting standards that were effective in 1998.

YEAR 2000
STATE OF READINESS
The Corporation has assessed its significant business systems, as well
as non-critical, peripheral support system for compliance with the Year 2000.
The assessment concluded that all significant business systems (i.e. customer
billing and service, financial, water treatment operating and control, water
quality laboratory information and telemetric data acquisition systems) are Year
2000 compliant. The assessment also included inquiries as to the state of
readiness of significant vendors whose services to the Corporation could have an
impact on the Corporation's ability to deliver service to its customers.
Management concluded that the delivery of electric power as well as chemicals
used in the water treatment process are two areas of significant importance and
received documentation from the vendors who provide these services that
indicates their ability to provide service. Therefore, the Corporation expects
no disruption in the services it provides to its customers and expects to
process transactions in its financial, customer billing and customer services
systems. The assessment did identify certain peripheral support systems that
need to be addressed. A plan to address these issues has been developed and is
being implemented.

THE COSTS TO ADDRESS THE CORPORATION'S YEAR 2000 ISSUES
The significant business systems of the Corporation defined above are Year 2000
compliant and have been operational for up to several years. Therefore, no
further costs are expected to be incurred in connection with bringing these
systems into compliance. The peripheral support systems that are being addressed
will require the Corporation to incur costs to bring them into compliance. The
present estimates place the total of these costs at less than $.2 million.

RISKS SSOCIATED WITH THE CORPORATION'S YEAR 2000 ISSUES
Management believes that all identifiable issues with respect to Year 2000
compliance have been addressed, or will be addressed, in sufficient time and in
sufficient detail to preclude any disruption in service or adverse effect on the
Corporation's financial profile. Management, therefore, believes that risks
associated with this issue are minimal with respect to those areas, which are
internal to the Corporation and, over which management exercises complete
control. Those areas that are external to the Corporation i.e., issues
associated with our vendors, have been mitigated to the extent possible through
inquiry of our vendors, tests of their claims of Year 2000 compliance and
development of contingency plans as considered appropriate.

CONTINGENCY PLAN 
There are operational contingency plans in place on an ongoing basis to address
issues, such as natural disasters, that could result in a disruption of service.
These procedures would be activated in the event that certain physical
facilities were not operable as a result of failures by our vendors associated
with Year 2000 issues. In addition, Elizabethtown Water Company has alternative
electric, natural gas and diesel generation capacity that could sustain a
significant level of pumping capacity for an indefinite period of time.

<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands Except Per Share Amounts)

                                                  Year Ended December 31,
                                                 1998       1997        1996

------------------------------------------------------------------------------
Operating Revenues                            $ 145,480  $ 133,826   $ 110,409
------------------------------------------------------------------------------
Operating Expenses:
  Operation                                     53,844      47,982     44,807
  Maintenance                                    6,539       6,606      5,859
  Depreciation and amortization                 13,679      12,396      9,893
  Revenue taxes                                 16,743      16,550     13,820
  Real estate, payroll and other taxes           3,027       3,152      2,952
  Federal income taxes (Note 3)                 11,685      10,487      6,791
------------------------------------------------------------------------------
        Total operating expenses                105,517     97,173     84,122
------------------------------------------------------------------------------
Operating Income                                39,963      36,653     26,287
------------------------------------------------------------------------------
Other Income (Expense):
  Allowance for equity funds used during
    construction (Note 2)                          607         215      3,725
  Federal income taxes (Note 3)                   (541)       (408)    (1,570)
  Other - net                                      940         953        760
------------------------------------------------------------------------------
        Total other income (expense)             1,006         760      2,915
------------------------------------------------------------------------------
Total Operating and Other Income                40,969      37,413     29,202
------------------------------------------------------------------------------
Interest Charges:
  Interest on long-term debt                    16,217      14,807     13,800
  Other interest expense - net                   1,641       2,560      2,645
  Capitalized interest (Note 2)                   (470)       (438)    (3,524)
  Amortization of debt discount and expense-net    438         411        395
------------------------------------------------------------------------------
        Total interest charges                  17,826      17,340     13,316
------------------------------------------------------------------------------
Income Before Preferred Stock Dividends
   of Subsidiary                                23,143      20,073     15,886
Preferred Stock Dividends                          813         813        813
------------------------------------------------------------------------------
Net Income                                    $ 22,330   $  19,260   $ 15,073
==============================================================================

Earnings Per Share of Common Stock (Note 2):
------------------------------------------------------------------------------
      Basic                                   $ 2.70     $    2.44   $   1.96
      Diluted                                 $ 2.66     $    2.41   $   1.96
------------------------------------------------------------------------------

Average Number of Shares Outstanding for
   the Calculation of Earnings Per Share:
------------------------------------------------------------------------------
      Basic                                      8,263       7,891      7,668
      Diluted                                    8,567       8,215      7,966
------------------------------------------------------------------------------

Dividends Paid Per Common Share               $   2.04   $    2.04   $   2.04
==============================================================================

See Notes to Consolidated Financial Statements.
<PAGE>

E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                (In Thousands)
                                                                December 31,
Assets                                                        1998        1997
------------------------------------------------------------------------------


Utility Plant-At Original Cost:
  Utility plant in service                               $ 717,985   $ 677,909
  Construction work in progress                             16,580       9,300
------------------------------------------------------------------------------
        Total utility plant                                734,565     687,209
   Less accumulated depreciation and amortization          125,262     114,424
------------------------------------------------------------------------------
        Utility plant-net                                  609,303     572,785
------------------------------------------------------------------------------


Non-utility Property and Other
  Investments - Net (Note 7)                                84,945     20,570
------------------------------------------------------------------------------


Current Assets:
  Cash and cash equivalents                                  5,909      6,233
  Short-term investments                                        31         31
  Customer and other accounts receivable
   (less reserve: 1998, $1,065, 1997, $612)                 24,720     17,539
  Unbilled revenues                                         12,198     10,412
  Infrastructure loan funds receivable (Note 4)              5,895
  Materials and supplies-at average cost                     2,538      1,966
  Prepaid insurance, taxes, other                            2,484      3,733
------------------------------------------------------------------------------
        Total current assets                                53,775     39,914
------------------------------------------------------------------------------


Deferred Charges (Note 9):
  Waste residual management                                  1,371        936
  Unamortized debt and preferred stock expenses             10,050     10,263
  Taxes recoverable through future rates (Note 3)           14,226     21,439
  Postretirement benefit expense (Note 12)                   3,490      3,738
  Other unamortized expenses                                 1,582      1,259
------------------------------------------------------------------------------
        Total deferred charges                              30,719     37,635
------------------------------------------------------------------------------
            Total                                        $ 778,742   $ 670,904
==============================================================================

See Notes to Consolidated Financial Statements.
<PAGE>

E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
     (In Thousands)
                                                                December 31,
Capitalization and Liabilities                                1998        1997
------------------------------------------------------------------------------

Capitalization (Notes 4 and 5):
  Common shareholders' equity                            $ 215,472   $ 193,923
  Mandatory Redeemable Cumulative Preferred Stock           12,000      12,000
  Redeemable preferred stock                                   227
  Long-term debt - net                                     286,908     247,298
------------------------------------------------------------------------------
        Total capitalization                               514,607     453,221
------------------------------------------------------------------------------


Current Liabilities:
  Notes payable - banks (Note 6)                            44,022     23,000
  Long-term debt - current portion (Note 4)                     30         30
  Accounts payable and other liabilities                    19,469     11,569
  Contract obligations payable                              12,000
  Customers' deposits                                          248        272
  Municipal and state taxes accrued                         16,789     16,817
  Interest accrued                                           3,675      3,456
  Preferred stock dividends accrued                             59         59
------------------------------------------------------------------------------
        Total current liabilities                           96,292     55,203
------------------------------------------------------------------------------


Deferred Credits:
  Customers' advances for construction                      41,102     39,131
  Federal income taxes (Note 3)                             66,487     69,916
  State income taxes                                           207        196
  Unamortized investment tax credits                         7,839      8,042
  Accumulated postretirement benefits (Note 12)              4,090      4,332
------------------------------------------------------------------------------
        Total deferred credits                             119,725     121,617
------------------------------------------------------------------------------


Contributions in Aid of Construction                        48,118     40,863
------------------------------------------------------------------------------


Commitments and Contingent Liabilities (Note 11)
------------------------------------------------------------------------------
                Total                                    $ 778,742   $ 670,904
==============================================================================

See Notes to Consolidated Financial Statements.
<PAGE>

E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(In Thousands Except Share Amounts)
                                                                December 31,
                                                              1998      1997
------------------------------------------------------------------------------
Common Shareholders' Equity:
  E'town Corporation:
    Common stock without par value, authorized,
     15,000,000 shares, issued 1998, 8,504,344 shares;
     1997, 8,054,461 share                               $ 169,324   $ 153,162
    Paid-in capital                                          1,315       1,315
    Capital stock expense                                   (5,160)     (5,160)
    Retained earnings                                       50,961      45,560
    Less cost of treasury stock; 1998, 32,554 shares;
     1997, 32,208 shares                                      (968)       (954)
------------------------------------------------------------------------------
        Total common shareholders' equity                  215,472     193,923
------------------------------------------------------------------------------
Preferred Shareholders' Equity (Note 4)
  Elizabethtown Water Company:
    Mandatory Redeemable Cumulative Preferred Stock:
      $100 par value, authorized, 200,000 shares; $5.90
      series, issued and outstanding, 120,000 shares        12,000      12,000
   Cumulative Preferred Stock:
       $25 par value, authorized, 500,000 shares;
        none issued
   Applied Wastewater Management, Inc:
       Redeemable Preferred Stock:
       No par value, non-cumulative, issued and
        outstanding, 227 shares                                227
------------------------------------------------------------------------------
        Total preferred shareholders' equity                12,227      12,000
------------------------------------------------------------------------------
Long-Term Debt (Notes 4 and 8):
  E'town Corporation:
    6 3/4% Convertible Subordinated Debentures, due 2012    10,499      11,354
    6.79% Senior Notes, due 2007                            12,000       4,000
  Liberty Water Company:
    Contract Obligations Payable                            19,000
  Applied Wastewater/Applied Water Management:
    Notes Payable                                              261
  Elizabethtown Water Company:
    7.20% Debentures, due 2019                              10,000      10,000
    7 1/2% Debentures, due 2020                             15,000      15,000
    6.60% Debentures, due 2021                              10,500      10,500
    6.70% Debentures, due 2021                              15,000      15,000
    8 3/4% Debentures, due 2021                             27,500      27,500
    8% Debentures, due 2022                                 15,000      15,000
    5.60% Debentures, due 2025                              40,000      40,000
    7 1/4% Debentures, due 2028                             50,000      50,000
    Variable Rate Debentures, due 2027                      50,000      50,000
  The Mount Holly Water Company:
    New Jersey Environmental Infrastructure Trust Notes      7,295
    New Jersey Department of Environmental Protection Notes  5,895
    Notes Payable (due serially through 2000)                   30          57
------------------------------------------------------------------------------
        Total long-term debt                               287,980     248,411
    Unamortized (discount) premium-net                      (1,072)    (1,113)
------------------------------------------------------------------------------
        Total long-term debt-net                           286,908     247,298
------------------------------------------------------------------------------
           Total Capitalization                          $ 514,607   $ 453,221
==============================================================================
See Notes to Consolidated Financial Statements.
<PAGE>

E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Thousands Except Share Amounts)
                                                   Year Ended December 31,
                                                 1998       1997        1996
------------------------------------------------------------------------------

Common Stock:
Balance at Beginning of Year                   $ 153,162  $ 145,661  $ 138,668
Common stock issued under Dividend Reinvestment
 and Stock Purchase Plan (1998, 213,568 shares;
 1997, 227,992 shares; 1996, 258,673 shares)       7,861      6,980      6,993
Redemption of Convertible Debentures (1998,
 18,100 shares)                                      724
Issuance of restricted stock under compensation
 programs (1998, 9,590 shares; 1997, 4,033 shares)   332        123
Issuance of restricted stock for acquisitions
   (1998, 186,310 shares) (Note 7)                 6,653
Exercise of stock options (1998, 22,315 shares;
 1997, 14,685 shares)                                592        398
------------------------------------------------------------------------------
      Balance at End of Year                     169,324    153,162    145,661
------------------------------------------------------------------------------

Paid-in Capital:                                   1,315      1,315      1,315
------------------------------------------------------------------------------

Capital Stock Expense:                            (5,160)    (5,160)    (5,160)
------------------------------------------------------------------------------

Retained Earnings:
  Balance at Beginning of Year                    45,560     42,434     42,995
  Net Income                                      22,330     19,260     15,073
  Dividends on common stock (1998, 1997 and 
   1996, $2.04)                                  (16,929)   (16,134)   (15,634)
------------------------------------------------------------------------------
      Balance at End of Year                      50,961     45,560     42,434
------------------------------------------------------------------------------

Treasury Stock:
  Balance at Beginning of Year                      (954)      (737)     (737)
   Cost of shares redeemed to exercise stock
    options (1998, 346 shares; 1997, 6,332 shares)   (14)      (217)
------------------------------------------------------------------------------
      Balance at End of Year                        (968)      (954)     (737)
------------------------------------------------------------------------------

     Total Common Shareholders' Equity         $ 215,472  $ 193,923 $ 183,513
==============================================================================

See Notes to Consolidated Financial Statements.
<PAGE>

E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
         (In Thousands)
                                                   Year Ended December 31,
                                                 1998       1997        1996
------------------------------------------------------------------------------
Cash Flows Provided by Operating Activities:
 Net Income                                   $ 22,330   $  19,260   $ 15,073
 Adjustments to reconcile net income to net
  cash provided by operating activities:
   Depreciation and amortization                13,679      12,396      9,893
   (Increase) decrease in deferred charges        (736)        699       (638)
   Deferred income taxes and investment tax
     credits-net                                 3,592       2,778      4,917
   Capitalized interest and AFUDC               (1,077)       (653)    (7,249)
   Other operating activities-net               (1,227)        382        305
 Change in current assets and current liabilities
  excluding cash, short-term investments and
  current portion of debt:
     Customer and other accounts receivable     (7,181)     (1,352)      (203)
     Unbilled revenues                          (1,786)     (1,056)    (1,912)
     Accounts payable and other liabilities      7,876      (4,656)      (634)
     Accrued/prepaid interest and taxes          1,440       3,088     (1,755)
     Other                                        (572)         99       (133)
------------------------------------------------------------------------------
   Net cash provided by operating activities    36,338      30,985     17,664
------------------------------------------------------------------------------
Cash Flows Provided by Financing Activities:
 Proceeds from issuance of common stock          9,163       7,284      6,993
 Funds held in Trust by others                  (7,234)
 Proceeds from issuance of debentures                       54,000
 Debt and preferred stock issuance and
   amortization costs                              213        (755)       430
 Issuance of other of long-term debt            15,295
 Repayment of long-term debt                    (1,381)       (224)      (233)
 Contributions and advances for construction-net 9,226       4,759      2,521
 Net increase (decrease) in notes
  payable - banks                               21,022     (46,000)    42,000
 Dividends paid on common stock                (16,929)    (16,134)   (15,634)
------------------------------------------------------------------------------
  Net cash flows provided by 
  financing activities                          29,375       2,930     36,077
------------------------------------------------------------------------------
Cash Flows Used for Investing Activities:
 Utility plant and other capital expenditures
 (excluding allowance for funds used
  during construction)                          (44,634)   (24,612)   (55,125)
 Purchase of privatization contracts            (19,856)    (5,810)
Capital expenditures on privatization contracts  (2,747)      (717)
 Proceeds from sale of land                       1,200        440
 Development costs of land (excluding
   capitalized interest)                                      (211)      (313)
------------------------------------------------------------------------------
  Net cash flows used for investing activities  (66,037)   (30,910)   (55,438)
------------------------------------------------------------------------------
Net (Decrease) Increase in Cash
  and Cash Equivalents                             (324)     3,005     (1,697)
Cash and Cash Equivalents at
  Beginning of Period                             6,233      3,228      4,925
------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period      $ 5,909  $   6,233   $  3,228
==============================================================================
Supplemental Disclosures of Cash
  Flow Information:
    Cash paid during the year for:
      Interest (net of amount capitalized)    $ 16,532   $  16,719   $  8,966
      Income taxes                            $  7,723   $   6,023   $  5,723
      Preferred stock dividends               $    708   $     708   $    708
------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
<PAGE>

1. ORGANIZATION
E'town Corporation (E'town or Corporation), a New Jersey holding company, is the
parent company of Elizabethtown Water Company (Elizabethtown or Company), E'town
Properties, Inc. (Properties), Edison Water Company (Edison), Liberty Water
Company, (Liberty), Applied Water Management, Inc. (AWM) and Applied Wastewater
Management, Inc. (AWWM). The Mount Holly Water Company (Mount Holly) is a wholly
owned subsidiary of Elizabethtown.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include E'town and its subsidiaries.
Significant intercompany accounts and transactions have been eliminated.
Elizabethtown and Mount Holly are regulated water utilities. AWWM is a regulated
wastewater utility. All three companies follow the Uniform System of Accounts,
as adopted by the New Jersey Board of Public Utilities (BPU). 

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period.

UTILITY PLANT AND DEPRECIATION
Income is charged with the cost of labor, materials and other expenses incurred
in making repairs and minor replacements, and in maintaining the properties.
Utility plant accounts are charged with the cost of improvements and major
replacements of property. When depreciable property is retired or otherwise
disposed of, the cost thereof, plus the cost of removal net of salvage, is
charged to accumulated depreciation.

Depreciation is generally computed on a straight-line basis at functional rates
for all classes of assets. The provision for depreciation, as a percentage of
average depreciable property, was 1.81% for 1998, 1.85% for 1997 and 1.73% for
1996.

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
Elizabethtown, Mount Holly and AWWM capitalize, as an appropriate cost of
utility plant, an Allowance for Funds Used During Construction (AFUDC), which
represents the cost of financing major projects during construction. AFUDC, a
non-cash credit on the Statements of Consolidated Income, is added to the
construction cost of the project and included in rate base and then recovered
through depreciation charges in rates during the assets' useful lives. AFUDC is
comprised of a debt component (credited to Interest Charges) and an equity
component (credited to Other Income) in the Statements of Consolidated Income.
AFUDC totaled $1.08 million, $.38 million and $6.93 million for 1998, 1997 and
1996, respectively. AFUDC in 1996 was larger than other years due to the
construction of Elizabethtown's Canal Road Water Treatment Plant.

NON-UTILITY PROPERTY
Ongoing costs associated with real estate parcels are being expensed, as
incurred. Properties had capitalized direct costs, real estate taxes and
interest costs associated with certain real estate parcels as they were being
developed. All the parcels were available for sale as of November 1997 and
therefore, no interest was capitalized in 1998. The amount of interest
capitalized for 1997 and 1996 was $.27 million and $.32 million, respectively
(see Note 7).

REVENUES
Water revenues are recorded based on the amounts of water delivered to customers
through the end of each accounting period. This includes an accrual for unbilled
revenues for water delivered from the time meters were last read to the end of
the respective accounting periods. 

The construction division of AWM engages in fixed-price and modified fixed-price
contracts for the construction of wastewater facilities. These revenues are
recognized on the percentage-of-completion method, measured by the cost-to-cost
method.

Contract costs include all direct material and labor costs and those indirect
costs related to contract performance such as tools and vehicle costs. Selling,
general and administrative costs are charged to expense as incurred.

FEDERAL INCOME TAXES
E'town files a consolidated federal tax return. Deferred income taxes are
provided for temporary differences between the bases of assets and liabilities
for tax and financial statement purposes for the non-regulated companies.
Deferred income taxes are also provided for each regulated water utility to the
extent permitted by the BPU. The regulated water utilities account for prior
years' investment tax credits by the deferral method, which amortizes the
credits over the lives of the respective assets. The non-regulated companies
utilize the flow-through method to account for investment tax credits. This
method treats the credits as a reduction of federal income taxes in the year the
credits arise.

CUSTOMERS' ADVANCES FOR CONSTRUCTION AND CONTRIBUTIONS
IN AID OF CONSTRUCTION
Customers' Advances for Construction (CAC) and Contribu-tions in Aid of
Construction (CIAC) represent capital provided by developers for main extensions
to new real estate developments. Some portion of CAC is refunded based upon the
revenues that the new developments generate. CIAC also represents CAC that,
under the terms of individual main extension agreements, are no longer subject
to refund.

SHORT-TERM INVESTMENTS
Short-term investments are stated at cost, which approximates market value.

EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share are computed on the basis of the weighted average
number of shares outstanding. Diluted earnings per share assumes both the
conversion of the 6 3/4% Convertible Subordinated Debentures and common stock
equivalents, assuming all stock options are exercised (see Note 5). The
calculations of basic and diluted earnings per share for the three years ended
December 31, 1998 follow:


(thousands of dollars)                  1998            1997            1996
--------------------------------------------------------------------------------
Basic:
Net Income                      $     22,330    $     19,260    $     15,073
Average common shares
 outstanding                           8,263           7,891           7,668
--------------------------------------------------------------------------------
Basic earnings per share        $       2.70    $       2.44    $       1.96
================================================================================
Diluted:
Net income                      $     22,330    $     19,260    $     15,073
After tax interest expense
 applicable to 6 3/4%
  Convertible Subordinated 
   Debentures                           488              500             513
--------------------------------------------------------------------------------
Adjusted net income             $    22,818     $     19,760     $    15,586
--------------------------------------------------------------------------------
Average common shares 
 outstanding                          8,263            7,891           7,668
Additional shares from 
 assumed exercise of stock
  options                                42               40               6
Additional shares from           
 assumed conversion of 
  6 3/4% Convertible
   Subordinated Debentures              262              284             292
--------------------------------------------------------------------------------
Average common shares 
 outstanding as adjusted              8,567            8,215           7,966
--------------------------------------------------------------------------------
Diluted earnings per share      $      2.66     $       2.41     $      1.96
================================================================================

CASH EQUIVALENTS
The Corporation considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.

NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. The pronouncement requires disclosure of
selected information about operating segments in interim financial reports.
Although the Corporation did not meet the earnings or assets thresholds of SFAS
No. 131 in 1998, which would require segment reporting, it is expected the
Corporation will be required to report its various segments in 1999. Therefore,
the Corporation has reported such segment information in 1998 in anticipation of
meeting the requirements (see Note 14).

In February 1998 the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits," effective for fiscal years
beginning after December 15, 1997. The pronouncement revises certain disclosure
requirements for pension and other postretirement plans but does not change the
measurement or recognition of expenses under those plans. The pronouncement
standardizes the disclosure requirements for pensions and other postretirement
benefit obligations to the extent practicable; requires additional information
on changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis; and eliminates disclosures that are no longer
useful. E'town has adopted these new disclosure requirements for the year ended
December 31, 1998 (see Note 12).

In March 1998 the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP is effective for
fiscal years beginning after December 15, 1998, and establishes criteria for
capitalizing certain internal use software costs. Adoption of the SOP will not
have an effect on the Corporation's financial statements.

In April 1998 the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" which is effective for fiscal years beginning after December 15,
1998, and provides guidance on the expensing of costs of start-up activities as
these costs are incurred. E'town adopted this SOP in January 1998 and as a
result has recognized an expense of less than $.1 million for such start-up
costs in these financial statements. All expenditures for start-up costs during
1998 have been expensed as incurred.

In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." This Statement must be adopted by the quarter
ended March 31, 2000. The Corporation does not believe this Statement will have
any impact on its financial statements.

In June 1997 the FASB issued SFAS 130, "Reporting Comprehensive Income," which
is effective for fiscal years beginning after December 15, 1997. SFAS 130
dictates that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
displayed with the same prominence as other financial statements. It also
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
E'town adopted SFAS 130 effective January 1, 1998. The effects of adoption of
SFAS 130 are not material for E'town.

RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year's presentation.

3. FEDERAL INCOME TAXES
The computation of federal income taxes and the reconciliation of the tax
provision computed at the federal statutory rate (35%) with the amount reported
in the Statements of Consolidated Income follow:

(thousands of dollars)                  1998            1997            1996
--------------------------------------------------------------------------------
Tax expense at statutory rate       $ 12,378        $ 10,843        $  8,486
Items for which deferred taxes 
 are not provided:
  Difference between book 
   and tax depreciation                   63              58             132
  Other                                  (12)            197             (55)
Investment tax credits                  (203)           (203)           (202)
--------------------------------------------------------------------------------
Provision for federal income taxes  $ 12,226        $ 10,895        $  8,361
================================================================================
The provision for federal 
 income taxes is comprised 
 of the following:
Current                             $  8,301        $  6,759        $  3,249
Tax on main extension
 refunds                                 525           1,369             207
Deferred:
 Tax depreciation                      3,086           2,670           3,333
 Capitalized interest                     91             114           1,375
 Main cleaning and lining                796             612             587
 Other                                  (189)           (426)           (186)
Investment tax credits - net            (203)           (203)           (204)
Refund from IRS                         (181)     
--------------------------------------------------------------------------------
Total provision                     $ 12,226        $ 10,895        $  8,361
================================================================================

Elizabethtown and Mount Holly provide deferred taxes at the enacted statutory
rate for all temporary differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities irrespective of the
treatment for rate-making purposes. Management believes it is probable that the
accumulated tax benefits that previously have been treated as a flow-through
item to Elizabethtown and Mount Holly's customers will be recovered from utility
customers in the future. Accordingly, offsetting regulatory assets were
established. At December 31, 1998, Elizabethtown and Mount Holly had deferred
tax liabilities of $13.7 million and $.5 million, respectively. There were also,
at December 31, 1998, offsetting regulatory assets for the same amounts
representing the future revenue expected to be recovered through rates based
upon established regulatory practices which permit recovery of current taxes
payable. These amounts were determined using the enacted federal income tax rate
of 35% and were calculated in accordance with SFAS No. 109.

The tax effect of significant temporary differences representing deferred income
tax assets and liabilities as of December 31, 1998 and 1997 is as follows:

(thousands of dollars)                                  1998            1997
--------------------------------------------------------------------------------
Water utility plant - net                          $ (47,538)      $ (43,611)
Non-utility property                                     251              25
Other investments                                       (787)           (833)
Taxes recoverable through 
 future rates                                        (14,226)        (21,439)
Prepaid pension expense                                    2             103
Capitalized interest                                  (3,983)         (3,891)
Waste residuals                                         (480)           (322)
Other assets                                             560             429
Other liabilities                                       (286)           (377)
--------------------------------------------------------------------------------
Net deferred income tax liabilities                $ (66,487)      $ (69,916)
================================================================================

4. CAPITALIZATION 
E'town routinely makes equity contributions to Elizabethtown,
which represent the proceeds of common stock issued under E'town's Dividend
Reinvestment and Stock Purchase Plan (DRP). Such equity contributions amounted
to $7.86 million for the year ended December 31, 1998.

E'town also issued $6.65 million (186,310 shares) of common stock for the
purchase of Applied Wastewater General Partnership (AWG) (see Note 7).

The Corporation maintains a Shareholder' Rights Plan (Rights Plan). Generally,
under the Rights Plan, if a person or group acquires 10% or more of the
Corporation's common stock or announces a tender offer for the Corporation's
common stock, non-acquiring shareholders may, under certain circumstances,
exercise rights (Rights) to allow them to significantly increase their
percentage of ownership of the Corporation's common stock. Such Rights may be
redeemed by the Board of Directors.

PREFERRED STOCK
Elizabethtown's $5.90 Mandatory Redeemable Cumulative Preferred Stock is not
redeemable at the option of the Company. Elizabethtown is required to redeem the
entire issue at $100 per share on March 1, 2004.

AWWM's no par value, non-cumulative preferred stock is redeemable at the option
of the Corporation.

LONG-TERM DEBT
Elizabethtown's long-term debt indentures restrict the amount of retained
earnings available to Elizabethtown to pay cash dividends (which is the primary
source of funds available to the Corporation for payment of dividends on its
common stock) or acquire Elizabethtown's common stock, all of which is held by
E'town. At December 31, 1998, $7.56 million of Elizabethtown's retained earnings
were restricted under the most restrictive indenture provision. Therefore,
$43.40 million of E'town's consolidated retained earnings were unrestricted.

In October 1998 E'town filed a registration statement on Form S-3 with the
Securities and Exchange Commission (SEC) to issue up to $75 million of unsecured
medium-term notes. The SEC is currently reviewing the filing. E'town plans to
issue approximately $25 million of these notes in the first half of 1999 to
repay short-term debt incurred to finance the acquisition of the contract to
operate the water system of the city of Elizabeth and capital costs for the
non-regulated subsidiaries (see Note 7).

In November 1998 Mount Holly closed on loan agreements that will make available
up to $13.19 million in proceeds from the issuance of unsecured notes through
the New Jersey Environmental Infrastructure Trust Financing Program. This
program provides financing through two loans. The first loan, in the amount of
$7.30 million, is through the New Jersey Environmental Infrastructure Trust
(Trust), which issued tax-exempt bonds with average interest rates of 4.7%. The
second loan, in the amount of $5.89 million, is from the State of New Jersey,
acting through the New Jersey Department of Environmental Protection. The state
is participating in the Safe Drinking Water State Revolving Fund, authorized by
the Safe Drinking Water Act amendments of 1996, whereby the federal government
is funding the state loan at no interest cost. The effective interest rate for
the combined notes is approximately 2.60%. The proceeds of the loans will
finance the construction of the Mansfield Project (see Note 10).

In December 1997 E'town signed an agreement to issue $12 million of 6.79% Senior
Notes due December 15, 2007. E'town issued $4 million of these notes in December
1997, $6 million in January 1998 and $2 million in May 1998. The proceeds were
used to finance capital additions for Edison as well as to meet working capital
needs. The agreement requires the maintenance of a consolidated fixed charges
coverage ratio of at least 1.5 to 1 and a debt to total capitalization ratio not
to exceed .65 to 1. As of December 31, 1998, the fixed charges coverage ratio
was 2.8 to 1 and the debt to total capitalization ratio was .63 to 1, calculated
in accordance with the agreement.

In June 1997 Elizabethtown issued a total of $50 million of 30-year Variable
Rate Debentures due December 2027, $25 million of Series A and $25 million of
Series B, to evidence a like amount of Variable Rate Notes issued through the
New Jersey Economic Development Authority (NJEDA). The proceeds were used to
repay $50 million of balances outstanding under Elizabethtown's revolving credit
agreement. The NJEDA Notes are remarketed on a weekly basis, at which time the
interest rates on each issue are subject to change. The rates in effect as of
December 31, 1998, were 3.90% for Series A and 3.85% for Series B.

E'town's 6 3/4% Convertible Subordinated Debentures are convertible to E'town
common stock at $40 per share. At December 31, 1998, 262,475 shares of common
stock were reserved for issuance upon exercise of the conversion rights.

Liberty is obligated, under its contract with the city of Elizabeth, to make
installment payments of $12 million in June 1999, which has been recorded as
Contract Obligations Payable, and $19 million in June 2000, which has been
recorded as Long-term Debt in the financial statements (see Note 7).

5. PERFORMANCE STOCK PLAN AND STOCK OPTION PLAN
The Corporation has a Performance Stock Plan whereby, restricted stock is
awarded to key employees and is amortized over three years as compensation
expense. The Corporation recognized compensation expense of less than $.1
million for each of the three years ended December 31, 1998. The individual
share prices of restricted shares issued for 1998 and 1997 were $34.56 and
$30.50, respectively. No restricted shares were issued in 1996.

E'town has a Stock Option Plan, a qualified incentive plan, under which options
to purchase shares of E'town's common stock have been granted to key employees
at prices not less than the fair market value at the date of grant. The Stock
Option Plan provides that options may be exercised at any time after one year up
to an expiration date, not to exceed 10 years from the date of grant. There were
22,315 and 14,685 options exercised in 1998 and 1997, respectively, and none in
1996. There were 1,000 and 2,000 options forfeited in 1998 and 1997,
respectively, and none in 1996.

A summary of the details of stock option grants and 
outstanding balances is presented below:

        Year     Options   Option            Options Outstanding
        Granted  Granted   Price      12/31/98  12/31/97  12/31/96
        ----------------------------------------------------------
        1989      7,500     $24.67       2,200     7,500     7,500
        1990      7,500     $26.67       7,500     7,500     7,500
        1995     77,000     $27.12      44,300    60,315    77,000
        1996      4,000     $26.87       2,000     4,000     4,000
        1997     25,000     $29.75      25,000    25,000 
        1998      4,000     $41.00       4,000 
        ----------------------------------------------------------
        Total                           85,000   104,315    96,000
        ==========================================================

In connection with the adoption of SFAS 123 "Accounting for Stock-Based
Compensation," which was effective in 1996, the Corporation elected to continue
to account for its Stock Option Plan using the method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
provide proforma disclosure of the effect of adopting SFAS 123. The effect of
accounting for options under SFAS 123 would be to reduce earnings by $.03
million, $.06 million and less than $.01 million for 1998, 1997 and 1996,
respectively, and $.004, $.008 and $.0003 per share for 1998, 1997 and 1996,
respectively. The actual fair values of individual options granted for 1998,
1997 and 1996 were $5.14, $3.38 and $1.09, respectively. This calculation was
based upon the Black-Scholes option pricing model. The assumptions used in the
option pricing model for 1998, 1997 and 1996, respectively were as follows:
expected volatility 30%, 30% and 8.3%; dividend yield 4.3%, 6.5% and 7.4%. The
risk-free interest rate used for each of the three years was 7%.

6. LINES OF CREDIT
E'town has $98 million of uncommitted lines of credit with several banks, of
which up to $43 million is available to E'town for use by the Corporation or its
unregulated subsidiaries as of December 31, 1998. These lines, together with
internal funds and proceeds of future issuances of debt and preferred stock by
Elizabethtown, and sales of common stock and issuances of short- and long-term
debt by E'town, are expected to be sufficient to finance the Corporation's
capital needs.

Information relating to bank borrowings for 1998, 1997 and 1996
is as follows:

(thousands of dollars)                      1998           1997          1996
--------------------------------------------------------------------------------
Maximum amount outstanding              $ 44,000       $ 69,500      $ 69,000

Average monthly amount outstanding      $ 26,238       $ 43,525      $ 45,240

Average interest rate at year end            5.9%           6.2%          5.7%

Compensating balances at year end       $     0        $     0       $     0

Weighted average interest rate based 
 on average daily balances                   6.0%           5.8%          5.8%


7. NON-UTILITY PROPERTY AND OTHER INVESTMENTS
The detail of amounts included in Non-Utility Property and Other Investments at
December 31 is as follows :

(thousands of dollars)                                     1998          1997
--------------------------------------------------------------------------------
Concession fees on privatization 
 contracts - net of amortization                       $ 55,505      $  5,594
Capital assets for privatization 
 contracts - net of amortization                          3,341           700
Investments in real estate                               11,341        12,788
Funds held in trust by others                             7,234           
Goodwill on AWM and AWWM 
 acquisitions - net of amortization                       5,401           
Investment in SEGS                                        1,214         1,330
Other capital assets                                        637            
Other                                                       272           158
--------------------------------------------------------------------------------
Total                                                  $ 84,945      $ 20,570
================================================================================

Effective July 1, 1998, E'town, through Liberty, has entered into a contract
with the city of Elizabeth (Elizabeth), New Jersey to operate its water system
under a 40-year contract serving 17,900 customers. Under the contract, Liberty
made a payment to Elizabeth of $19.7 million in 1998 and is contractually
obligated to make payments to Elizabeth of $12 million in June 1999 and $19
million in June 2000, which have been included in Concession Fees on
Privatization contracts, net of amortization ($31 million representing a
non-cash transaction in 1998). These Concession Fees are being amortized on a
straight-line basis over the life of the contract. Also under the terms of the
contract, Liberty will deposit $57.8 million from revenues earned over the
40-year contract, of which $52.3 million is due after 2012, into a fund
administered by Elizabeth to be used by Elizabeth to pay for capital
improvements to the water system. In addition, Liberty is responsible for $7.45
million of construction expenditures, primarily for meter replacements, over the
life of the contract. These construction expenditures, as they are incurred, are
being amortized on a straight-line basis over the remaining life of the
contract. Of these total commitments, approximately $4.01 million is expected to
be expended in the next three years. E'town will receive all the revenues from
operating the system in accordance with rate increases set forth in the
contract. E'town is also responsible for all operating expenses as well as the
capital expenditures discussed above. Performance by Liberty of the contract
provisions is guaranteed by E'town. 

E'town also performs the commercial billing operations for the wastewater system
of Elizabeth. E'town does not operate the wastewater system. E'town does the
wastewater billing for Elizabeth and remits all cash collected to Elizabeth.
Recorded on the financial statements as Customer and Other Accounts Receivable
are the receivables from the customers of Elizabeth for wastewater services in
the amount of $3.37 million. An equal amount of liability to Elizabeth is
included in Accounts Payable and Other Liabilities which has been established to
reflect E'town's obligation to remit these funds to Elizabeth as collected.

In 1997 E'town formed a wholly-owned subsidiary, Edison Water Company (Edison),
for the purpose of managing the assets and operations of the Edison Township
water system under a 20-year contract. Edison serves approximately 11,600
residential, commercial and industrial customers. Edison bills and receives all
water revenues generated as a result of operating the water system of the
township of Edison, New Jersey and pays all the expenses under the contract.
Edison expects to make expenditures of approximately $25 million during the
20-year life of the contract of which $10.16 million has been spent to date.
Construction expenditures, as they are incurred, are being amortized on a
straight-line basis over the remaining life of the contract. Of the total,
approximately $3.61 million is expected to be expended in the next three years
of the contract. An initial payment of $5.7 million was made upon the closing in
June 1997 and has been included in concession fees on privatization contracts,
net of amortization. Performance by Edison of the contract provisions is
guaranteed by E'town.

Also included in Non-Utility Property and Other Investments at December 31,
1998, and 1997 is $11.34 million and $12.79 million, respectively, of
investments in various parcels of undeveloped land in New Jersey.

One of the real estate parcels was sold in 1997 for $.4 million, resulting in a
gain of less than $.1 million. Two other parcels were sold in 1998 for $1.7
million resulting in a gain of less than $.1 million. Cash proceeds of $1.2
million were received in 1998 and the balance was financed with a one-year
mortgage at an interest rate of 8%, with full payment due in 1999. On February
17, 1999, Properties sold a parcel of land which has been under contract since
1995 in Green Brook, New Jersey for $5.83 million, at a gain of $2.08 million
net of taxes. Cash proceeds of $1.5 million were received in 1999 and the
remaining $4.33 million was financed with a 7.75% mortgage, to be paid over two
years. The gain will be reflected in earnings in the first quarter of 1999. The
sale proceeds will be invested into water and wastewater investments that
produce a current return. Properties has entered into contracts for sale for all
of its remaining parcels. The eventual sale of these parcels is contingent upon
the purchaser obtaining various approvals for development. This process could
take several years. Based upon independent appraisals received at various times
prior to 1997 and the expected sales prices for properties under contract to be
sold, the estimated net realizable value of each property exceeds its respective
carrying value as of December 31, 1998.

In 1995 the Corporation entered into a three-year joint venture agreement with
the Applied Wastewater Group (AWG) to form a New Jersey limited liability
company, Applied Watershed Management, LLC. AWG was a unit of several privately
held and affiliated companies providing design, engineering, construction and
operating services for water and wastewater facilities. E'town exercised an
option to purchase the operations of AWG to provide a full complement of water
and wastewater services and consequently closed on the transaction in June 1998.
The purchase price, in a non-cash transaction, was $6.6 million (185,005
restricted common shares) for the three companies that now comprise AWM and $.04
million (1,305 restricted common shares) for AWWM, a regulated wastewater
utility, in a stock-for-stock transaction accounted for as a purchase. Of the
shares issued, 20% are being held in escrow. The goodwill amounted to $5.46
million, which is being amortized over a 40-year period. The purchase price is
subject to a potential downward post-closing adjustment based upon a multiple of
earnings for the twelve months ended March 31, 1998. As required by the purchase
contract, E'town has undertaken an audit of AWG for such period. Therefore, the
amount of any post-closing adjustment is not yet determinable. Had the
acquisition been consummated as of January 1, 1997, the pro-forma effect on
revenues, net income and earnings per share for the years ended December 31,
1998, and 1997 would be immaterial. A calculation of the net assets acquired in
the AWG transaction is as follows:

(thousands of dollars)          
--------------------------------------------------------------------------------
Working capital                                                      $ 1,171
Goodwill                                                               5,460
Utility plant in service - net of CIAC                                   427
Other property and investments                                           572
Long-term debt                                                          (750)
Preferred equity                                                        (227)
--------------------------------------------------------------------------------
Net assets acquired                                                  $ 6,653
================================================================================

Included in Non-Utility Property and Other Investments at December 31, 1998, and
1997 is an investment of $1.21 million and $1.33 million, respectively, ($.43
million and $.30 million net of related deferred taxes) in a limited partnership
that owns Solar Electric Generating System V (SEGS), located in California. The
Corporation owns a 3.19% interest in SEGS. The transaction is being accounted
for on the equity method. The Corporation will continue to monitor the
relationship between the carrying and net realizable values of its investment in
SEGS, based upon information provided by SEGS management as well as through cash
flow analyses.

8. FINANCIAL INSTRUMENTS
The carrying amounts and the estimated fair values, as of December 31, 1998, and
1997, of financial instruments issued or held by the Corporation are as follows:

(thousands of dollars)                                    1998          1997
--------------------------------------------------------------------------------
Short-term investments:
  Carrying amount                                    $      31     $      31
  Estimated fair value                                      69            59
Cumulative preferred stock:
  Carrying amount                                    $  12,227     $  12,000
  Estimated fair value                                  13,247        11,760
Long-term debt:
  Carrying amount                                    $ 267,908     $ 247,298
  Estimated fair value                                 280,630       254,599

Estimated fair values are based upon quoted market prices for these or similar
securities.

9. REGULATORY ASSETS AND LIABILITIES
Certain costs incurred by Elizabethtown and Mount Holly, which have been
deferred, have been recognized as regulatory assets and are being amortized over
various periods, as set forth below:

(thousands of dollars)                                    1998          1997
--------------------------------------------------------------------------------
Waste residual management                           $    1,371     $     936
Unamortized debt and preferred stock expense             9,368         9,656
Taxes recoverable through future rates (Note 3)         14,226        21,439
Postretirement benefit expense (Notes 10 and 12)         3,490         3,738
Safety management expense                                  245           331
Business process redesign                                  210           284
Rate case expenses                                           7            80
PWAC under (over) recovery                                 305            (8)
--------------------------------------------------------------------------------
Total                                                $  29,222     $  36,456
================================================================================

WASTE RESIDUAL MANAGEMENT
The costs of disposing of the byproducts generated by Elizabethtown's and Mount
Holly's water treatment plants are being amortized and recovered in rates over
three- and five-year periods, respectively, for ratemaking and financial
statement purposes. No return is being earned on the deferred balances related
to these programs.

UNAMORTIZED DEBT AND PREFERRED STOCK EXPENSES
Costs incurred in connection with the issuance or redemption of long-term debt
have been deferred and are being amortized and recovered in rates over the lives
of the respective issues for ratemaking and financial statement purposes. Costs
incurred in connection with the issuance and redemption of preferred stock have
been deferred and are being amortized and recovered in rates over a 10-year
period for ratemaking and financial statement purposes.

OTHER
Safety management expenses and business process redesign expenses relate to
studies undertaken by the Company and are being amortized and recovered in rates
over five years.

PURCHASED WATER ADJUSTMENT CLAUSE
In 1994 Elizabethtown established a Purchased Water Adjustment Clause (PWAC), to
reflect the cost of water purchased from the New Jersey Water Supply Authority
(NJWSA). The current rate for the PWAC is zero since the costs of purchased
water were reflected in the 1996 rate case; however, because of the high pumpage
in the summer of 1998, Elizabethtown has underrecovered its purchased water
costs and therefore, has deferred $.23 million as of December 31, 1998. As of
December 31, 1998, Mount Holly has deferred $.08 million of PWAC costs (see Note
10).

RATE CASE EXPENSES
Rate case expenses are being substantially recovered in rates during two-year
periods. There were no regulatory liabilities at December 31, 1998, or 1997.

10. REGULATORY MATTERS
ELIZABETHTOWN
In December 1997 the BPU adopted a Stipulation for rate increases for
Elizabethtown and Mount Holly, effective January 1, 1998, for the full recovery
of costs associated with SFAS No. 106 "Accounting for Employer's Postretirement
Benefits" on an accrual basis less the costs associated with SFAS No. 106
expenses previously recovered in rates. The total increases in annual operating
revenues resulting from these Stipulations are $.39 million for Elizabethtown
and $.02 million for Mount Holly.

Elizabethtown expects to file for rate relief later in 1999 to recover
additional construction and financing costs incurred since base rates were last
established in October 1996.

MOUNT HOLLY
On October 6, 1998, the BPU issued an Order adopting a Stipulation signed by the
parties to Mount Holly's proceeding for a review of the prudency of constructing
a new well field, treatment plant and pipeline to provide an alternate water
source required due to state mandated restrictions. This project is known as the
Mansfield Project. The Stipulation indicated that the Mansfield Project provides
the most cost-effective alternative available to Mount Holly customers for
meeting the requirements for an alternative source of supply for the Mount Holly
system. Effective in March 1998 Mount Holly began purchasing one million gallons
per day from New Jersey-American Water Company (NJAM) and will continue to
purchase this water until the later of January 1, 2000, or the date the
Mansfield Project is placed into service.

In September 1997 Mount Holly filed a petition with the BPU to establish a PWAC
to reflect the cost of water purchased from NJAM under the agreement discussed
above. On May 27, 1998, the BPU adopted a Stipulation signed by the parties to
the PWAC case for an increase in annual revenues under Mount Holly's PWAC of
$1.29 million or 38.9%. Mount Holly has deferred the increase in purchased water
cost between March 19 and May 27 as Other Unamortized Expenses. Recovery of this
amount has been requested in the rate increase discussed below. As of December
31, 1998, Mount Holly has deferred $.08 million of these costs.

On January 29, 1999, Mount Holly filed a petition with the BPU for a $2.09
million or 40.55% rate increase, which reflects additional construction and
financing costs, as well as increases in operating costs since base rates were
last established in January 1996. This rate case also includes $8.96 million in
costs with a corresponding rate increase of $1.30 million, for the portion of
the Mansfield Project that was placed in service in the third quarter of 1998. A
decision is expected during the fall of 1999. Mount Holly expects to file an
additional rate case later in 1999 for the remaining cost of the Mansfield
Project, to coincide with the completion of the project and the expiration of
the agreement to purchase water from NJAM and the cancellation of the PWAC.

11. COMMITMENTS AND CONTINGENT LIABILITIES
Elizabethtown is obligated, under a contract that expires in 2013, to purchase
from the NJWSA a minimum of 37 billion gallons of water annually. Effective July
1, 1997, the annual cost of water under contract is $7.86 million. The Company
purchases additional water from the NJWSA on an as-needed basis. The total cost
of water purchased from the NJWSA was $8.91 million, $8.79 million and $8.70
million for 1998, 1997 and 1996, respectively.

Mount Holly is obligated, under a contract, to purchase water from NJAM, at a
rate of one million gallons per day until the Mansfield Project is completely in
service in approximately January 2000. The annual cost of the purchased water is
$1.16 million.

In connection with E'town's agreement to operate the water systems of the
township of Edison and the city of Elizabeth, E'town has certain contractual
commitments which are set forth in Note 7.

Capital expenditures of E'town and its subsidiaries are estimated to be $150.43
million, exclusive of concession fees, through 2001, of which $140.96 million is
for Elizabethtown, Mount Holly and AWWM's utility plant and $9.47 million is for
non-utility expenditures.

Expected future minimum rental payments required under noncancelable leases with
terms in excess of one year at December 31 of each of the years 1999 through
2003 are: 1999, $.97 million; 2000, $.99 million; 2001 $1.03 million; 2002, $.90
million and 2003, $.61 million. Rent expense totaled $.83 million, $.72 million
and $.84 million in 1998, 1997 and 1996, respectively.

Elizabethtown and AWM lease vehicles and certain office equipment. The minimum
payments required under noncancelable leases with terms in excess of one year at
December 31 of each of the years 1999 through 2003 are: $1.04 million, $1.04
million, $1.03 million, $1.02 million and $1.02 million. The lease expense for
1998 was $.29 million. There were no lease expenses for 1997 or 1996 as vehicles
were not leased during that time period.

ENVIRONMENTAL, LEGAL AND OTHER MATTERS
There are environmental matters that are inherent in the production,
transmission and distribution of water as well as in the treatment of
wastewater. The Corporation is sensitive to these issues and mitigates the
environmental impact of these activities to the extent required by the laws and
regulations under which these activities are governed and makes efforts to
exceed the regulatory requirements where practical.

The Corporation, in the ordinary course of business, periodically becomes
involved in litigation. There is currently no litigation in progress regarding
environmental or other issues in which an outcome adverse to the Corporation
would have a material impact on the financial statements.

12. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
PENSION PLAN
Elizabethtown has a trusteed, noncontributory retirement plan, which covers most
employees of Elizabethtown, Mount Holly and Properties.

SUPPLEMENTAL PENSION PLAN
The Corporation also has a supplemental retirement plan for certain management
employees that is not funded. Benefit payments under this plan are made directly
by the Corporation. The unfunded benefit obligation at December 31, 1998, and
1997 was $1.51 million and $1.45 million, respectively.

OTHER POSTRETIREMENT BENEFITS 
The Corporation provides certain health care and life insurance benefits for
substantially all of its retired employees. As a result of a contract negotiated
in February 1996 with the Company's bargaining unit, all union and non-union
employees retiring after January 1, 1997, pay 25% of future increases in the
premiums the Company pays for postretirement medical benefits.

Under SFAS No. 106, the costs of postretirement benefits are accrued for each
year the employee renders service, based on the expected cost of providing such
benefits to the employee and the employee's beneficiaries and covered
dependents, rather than expensing these benefits on a pay-as-you-go basis.

The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1998, and for 1998 was 9%.
This rate decreases linearly each successive year until it reaches 3.8% in 2008,
after which the rate remains constant.

The rate increases effective January 1, 1998, allow for the full recovery of
costs associated with the implementation of SFAS No. 106, including an
amortization over 15 years of amounts previously deferred which were in excess
of amounts previously being recovered in rates. As of December 31, 1998, the
amounts that have been deferred are $3.36 million and $.13 million for
Elizabethtown and Mount Holly, respectively.

Based upon an independent actuarial study, the transition obligation, calculated
under SFAS No. 106, was $7.26 million as of January 1, 1993, the date of
adoption of SFAS No. 106. The transition obligation is being amortized over 20
years.
                                                            Other Postretirement
                                             Pension Plans          Benefits
(thousands of dollars)                       1998     1997       1998      1997
--------------------------------------------------------------------------------
FUNDED STATUS
Change in benefit obligation during year
 Benefit obligation at beginning of year $40,447  $37,524   $  6,604   $ 6,122
  Service cost                             1,407    1,322        390       389
  Interest cost                            2,855    2,734        486       449
  Benefit payments                        (2,092)  (1,866)                     
  Actuarial (gain) or loss                 3,263      733        458      (356)
--------------------------------------------------------------------------------
 Benefit obligation at end of year        45,880   40,447      7,938     6,604
================================================================================
Change in plan assets during year
 Fair value of plan assets at
  beginning of year                        46,803   40,257      1,331       764
 Employer contributions                       174      174        731       375
 Benefit payments                          (2,092)  (1,866) 
 Actual return on plan assets               7,268    8,238        109       192
-------------------------------------------------------------------------------
 Fair value of plan assets at end of year  52,153   46,803      2,171     1,331
================================================================================
Reconciliation of funded status at 
 end of year 
 Funded status                              6,273    6,357     (5,767)   (5,273)
 Unrecognized net transition (asset)
  or obligation                            (1,365)  (1,631)     5,079     5,442
 Unrecognized prior service cost            2,415    2,751
 Unrecognized net (gain) or loss           (7,662)  (8,005)    (3,063)   (3,973)
--------------------------------------------------------------------------------
 Accumulated postretirement benefits*    $   (339) $  (528)  $ (3,751) $ (3,804)
================================================================================
 *Recognized in the Consolidated Balance Sheets
<PAGE>

                                                          Other Postretirement
                                        Pension Plans            Benefits
(thousands of dollars)             1998    1997     1996   1998    1997    1996
--------------------------------------------------------------------------------
Net periodic benefit cost
 recognized for year
 Service cost                   $ 1,407 $ 1,322  $ 1,341  $ 390   $ 389   $ 423
 Interest cost                    2,855   2,734    2,771    486     449     430
 Expected return on plan assets  (4,125) (3,542)  (4,569)  (109)    (57)    (72)
 Net amortization and deferral     (153)     66    1,229    158     140     419
 Deferred amount for regulated
  companies pending recovery                                       (273)   (564)
--------------------------------------------------------------------------------
 Net periodic benefit cost      $   (16)$   580  $   772  $ 925   $ 648   $ 636
================================================================================
Weighted-average assumptions
 for year
 Discount rate                     7.25%   7.50%   7.00%   7.25%   7.50%   7.00%
 Rate of compensation increases    4.00%   4.00%   4.00%
 Expected long-term rate of return
  on plan assets                   9.00%   9.00%   9.00%   9.00%   9.00%   9.00%

Weighted-average assumptions at
 end of year
 Discount rate                     6.75%   7.25%   7.50%   6.75%   7.25%   7.50%
 Rate of compensation increases    4.00%   4.00%   4.00%
--------------------------------------------------------------------------------

A single percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
as of December 31, 1998, and the net postretirement service and interest cost by
approximately $.84 million and $.19 million, respectively.

13. RELATED PARTY TRANSACTIONS
Utility Billing Services, Inc., a subsidiary of NUI Corporation, of which John
Kean, who is an E'town Director, is Chairman of the Board and a Director,
provides data processing and related services to Elizabethtown and other
subsidiaries of the Corporation. The charges for all services totaled $.93
million, $.72 million, and $.65 million, for 1998, 1997 and 1996, respectively.
The current contract expires December 31, 2000. Elizabethtown had a line of
credit in the amount of $10 million with Summit Bank of which Anne Estabrook,
who is Chairman of E'town and Elizabethtown, is a Director, which expired on
June 30, 1998. The Corporation has a line of credit in the amount of $10 million
effective November 1998. At December 31, 1998, E'town had loans outstanding with
Summit Bank in the amount of $2.5 million. Total interest charges paid to Summit
Bank by Elizabethtown and E'town were $.07 million, $.35 million and $.14
million for 1998, 1997 and 1996, respectively. Summit Bank also serves as a bond
trustee for Elizabethtown for which Elizabethtown paid fees of less than $.10
million in 1998, 1997 and 1996.

14. SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires that companies disclose segment data based upon how
management makes decisions, allocates resources and measures performance. The
1998 segment data is presented as follows:

                                        Engineering/ Financing
                   Regulated Contract   Operations/    and       Elimin-      
                   Utilities Operations Construction Investment  ations   Total
--------------------------------------------------------------------------------
(thousands of dollars)
1998
Revenues            $134,943 $ 12,126   $ 5,735          -    $ (7,324) $145,480
Operating Expenses    95,432   10,968     5,699     $   635     (7,217)  105,517
Interest Expense      15,619      843        (6)      1,370        -      17,826
Depreciation and 
 Amortization Expense 12,500    1,035        81          63        -      13,679
Net Income (Loss)     23,871      420        43      (2,192)       188    22,330
Total Assets         688,046   68,539     3,744      44,964    (26,551)  778,742
Total Debt          $268,056  $31,000   $   179     $44,499   $   (774) $342,960
================================================================================
1997
Revenues            $131,788 $  3,330      -        $   512   $ (1,804) $133,826
Operating Expenses    94,722    2,997      -          1,299     (1,845)   97,173
Interest Expense      16,622      167      -            551        -      17,340
Depreciation and
 Amortization Expense 12,233      163      -             -         -      12,396
Net Income (Loss)     20,092      166      -           (723)      (275)   19,260
Total Assets         646,318    9,020      -         25,230     (9,664)  670,904
Total Debt          $249,974 $  5,841      -        $20,354   $ (5,841) $270,328
================================================================================

The Regulated Utilities segment provides water and wastewater services through
Elizabethtown, Mount Holly and AWWM, acquired in June 1998. This segment is
regulated by the BPU.

The Contract Operations segment is comprised of Liberty, formed in July 1998,
and Edison, formed in July 1997, and provides water services under contract to
municipalities.

The Engineering/Operations/Construction segment is comprised of AWM, acquired in
June 1998, and provides engineering, operating and construction services,
primarily in the wastewater field.

The Financing and Investment segment is comprised of Properties and E'town.
E'town provides the equity financing for all the other segments and debt
financing for all segments other than the Regulated Utilities segment.
Properties owns real estate parcels.

Eliminations are comprised of the accounting entries necessary to eliminate
intercompany sales, expenses and investments.

15. QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of financial data for each quarter of 1998 
and 1997 follows:

(thousands of dollars except per share amounts)       
                                                          Basic         Diluted
                Operating       Operating       Net      Earnings       Earnings
Quarter         Revenues        Income         Income    Per Share     Per Share
--------------------------------------------------------------------------------
1998
1st            $ 31,267        $ 8,455       $ 4,163        $ .52         $ .51
2nd              33,609          9,376         5,162          .63           .62
3rd              43,907         12,917         8,555         1.02          1.00
4th              36,697          9,215         4,450          .53           .53
--------------------------------------------------------------------------------
Total          $145,480        $39,963       $22,330        $2.70         $2.66
================================================================================
1997
1st            $ 30,121        $ 8,011       $ 3,470        $ .44         $ .44
2nd              32,463          8,785         4,405          .56           .55
3rd              38,643         11,776         7,454          .93           .92
4th              32,599          8,081         3,931          .51           .50
--------------------------------------------------------------------------------
Total          $133,826        $36,653       $19,260        $2.44         $2.41
================================================================================

Water utility revenues are subject to seasonal fluctuation 
due to normal increased water consumption during the 
third quarter of each year.
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of E'town Corporation:

We have audited the  accompanying  consolidated  balance  sheets and statements
of consolidated  capitalization  of E'town  Corporation and its subsidiaries as
of December  31,  1998 and 1997,  and the related  statements  of  consolidated
income,  shareholders'  equity,  and cash flows for each of the three  years in
the  period  ended  December  31,  1998.  These  financial  statements  are the
responsibility of the Company's  management.  Our  responsibility is to express
an opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally  accepted  auditing
standards.  Those  standards  require  that we plan and  perform  the  audit to
obtain  reasonable  assurance  about whether the financial  statements are free
of  material  misstatement.  An  audit  includes  examining,  on a test  basis,
evidence  supporting the amounts and  disclosures in the financial  statements.
An  audit  also  includes   assessing  the  accounting   principles   used  and
significant  estimates  made by  management,  as well as evaluating the overall
financial  statement  presentation.  We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial statements present fairly, in all
material  respects,  the  financial  position  of  E'town  Corporation  and its
subsidiaries  at  December  31,  1998  and  1997,  and  the  results  of  their
operations  and their  cash  flows for each of the  three  years in the  period
ended  December  31, 1998 in  conformity  with  generally  accepted  accounting
principles.


/s/ Deloitte & Touche LLP

February 24, 1999
Parsippany, New Jersey
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
-------------------------------------------------------------------------------
OTHER FINANCIAL AND STATISTICAL DATA
                                  1998      1997      1996      1995      1994
-------------------------------------------------------------------------------
UTILITY PLANT (THOUSANDS)
 Utility Plant - net          $609,303  $572,785  $560,024  $507,858   437,456 
 Construction Expenditures
  (excluding AFUDC)             47,381    25,329    55,125    73,789    69,981
CAPITALIZATION (THOUSANDS)
 Shareholders' Equity          215,472   193,923   183,512   177,081   152,971
 Preferred Stock                12,227    12,000    12,000    12,000    12,000
 Debt (1)                      342,960   270,328   262,511   220,703   177,115
Total Capitalization          $570,659  $476,251  $458,023  $409,784  $342,086 
CAPITALIZATION RATIOS
 Common Stock                       38%       41%       40%       43%       44%
 Preferred Stock                     2%        2%        3%        3%        4%
 Debt (1)                           60%       57%       57%       54%       52%
COMMON STOCK DATA
 Earnings Per Share:
  Basic                       $   2.70  $   2.44  $   1.96  $   2.16  $   1.95 
  Diluted                         2.66      2.41      1.96      2.14      1.94
  Dividends Per Share             2.04      2.04      2.04      2.04      2.04
  Book Value Per Share        $  25.43  $  24.17  $  23.58  $  23.54  $  23.17 
  Average Shares
   Outstanding: (Thousands)
    Basic                        8,263     7,891     7,668     7,093     6,210
    Diluted                      8,567     8,215     7,966     7,394     6,519
 Revenues (Thousands)
  General Customers           $ 87,794  $ 85,195  $ 68,797  $ 67,455  $ 62,923 
  Other Water Systems           22,181    21,900    18,929    18,720    18,082
  Industrial Wholesale           8,148     8,451     7,869     7,947     7,458
  Fire Service/Miscellaneous    16,820    16,754    14,814    14,276    13,570
  Contract Operations           12,126     3,330
  Engineering Operations 
   & Consruction                 5,735
  Elimination of Intercompany
   Sales                        (7,324)   (1,804)
  Total Revenues              $145,480  $133,826  $110,409  $108,398  $102,033 
  Net Income                  $ 22,330  $ 19,260  $ 15,073  $ 15,296  $ 12,088 
WATER SALES - MILLIONS OF
 GALLONS (MG)
  General Customers             24,614    24,333    22,890    23,999    23,551
  Other Water Systems           14,396    14,504    15,049    15,569    15,691
  Industrial Wholesale           3,482     3,533     3,567     3,673     3,568
  Contract Operations            5,091     1,307
  System Use and Unaccounted For 6,934     6,948     6,444     6,402     6,570
  Elimination of
   Intercompany Sales           (3,899)   (1,163)
  Total Water Sales             50,618    49,462    47,950    49,643    49,380
SYSTEM DELIVERY BY SOURCE - MG
 Surface                        48,067    42,585    41,485    42,646    42,534
 Wells                           1,072     6,689     6,328     6,764     6,690
 Purchased                       5,378     1,351       137       233       156
 Elimination of Intercompany
  Sales                         (3,899)   (1,163)
 Total System Delivery          50,618    49,462    47,950    49,643    49,380
MILLIONS OF GALLONS PUMPED:
 Average Day                       139       135       131       136       135
 Maximum Day                       217       205       170       183       182
CUSTOMERS
 Regulated  Utilities          200,536   197,663   195,482   192,617   189,440
 Contract Operations            33,908    15,264
 Total Customers               234,444   212,927
GENERAL INFORMATION
 Miles of Main                   2,955     2,926     2,899     2,869     2,828
 Fire Hydrants Served           16,426    16,228    16,012    15,650    15,291
 Total Employees                   505       399       400       398       386
===============================================================================
(1) Includes long-term debt, notes payable, long-term debt-current portion and
    contract obligations payable.
<PAGE>

Stock Price And Dividend Data - E'town's Common Stock is traded on the New York
Stock Exchange under the symbol ETW.

1998
------------------------------------------------
Quarter            1st     2nd      3rd     4th
Closing Price
   Low:         $34.38  $33.88   $36.44  $40.75          
   High:        $39.69  $38.06   $43.75  $47.38  
Dividend Paid   $ 0.51  $ 0.51   $ 0.51  $ 0.51  
================================================
1997
------------------------------------------------
Quarter            1st     2nd      3rd     4th
Closing Price
   Low:         $29.12  $29.50   $30.50  $31.87   
   High:        $31.75  $34.87   $34.00  $40.50 
Dividend Paid   $ 0.51  $ 0.51   $ 0.51  $ 0.51 
================================================